Section 115A - 10% on Royalty and FTS Where the total income of a foreign company or a non-resident includes any income by way of royalty or fees for technical services other than the income referred to in section 44DA: (A) received from the Government in pursuance of an agreement made by the non-resident/ foreign company with the Government, or (B) received from the Indian concern in pursuance of an agreement made by the non-resident/ foreign company with the Indian concern and the agreement is approved by the Central Government IMPORTANT TIPS: 1. Special rate of tax is applicable on the above-mentioned incomes only. Balance income of the assessee will be chargeable to tax at normal rates applicable to assessee. 2. No approval of Central Government is required in case of an agreement referred to in (B) above if the agreement relates to a matter included in the industrial policy, for the time being in force, of the Government of India and the agreement is in accordance with that policy. 3. No deduction in respect of any expenditure or allowance shall be allowed to the assessee under section 28 to 44C and section 57 in computing the incomes at (A) and (B) above. 4. The provisions of Chapter VI, i.e., Set-off, Carry forward and set off of losses, are applicable. Therefore, the losses of the current year as well as brought forward losses can be set off against the incomes referred to in (A) and (B) above, subject to the provisions of Chapter VI. 5. The unabsorbed depreciation, current year as well as brought forward, of any business cannot be set off against the incomes referred to in (A) and (B) above, since the set off and carry forward of depreciation is governed by section 32. 6. Chapter VI-A benefits are also available 7. Import of software is taxable in the hands of NR who is the seller. If a resident imports a software from abroad/get a license to use the software from abroad, then the payment received by foreigner shall be treated as royalty. Since the software is to be used in India, the royalty shall be taxable in hands of foreigner in India and the Indian making the payment shall deduct TDS under section 195 @ 10% as given in section 115A. [If rate as per DTAA is lower, TDS will be on such lower rate]
Case Law CIT v. Alcatel Lucent Canada (2015) (Del) Can consideration for supply of software embedded in hardware tantamount to royalty' under section 9(l)(vi)? Facts The assessee, a company incorporated in France, was engaged in manufacture, trade and supply equipment and services for GSM Cellular Radio Telephones Systems. It supplied hardware and software to various entities in India. Software licensed by the assessee embodied the process which is required to control and manage the specific set of activities involved in the business use of its customers. The Assessing Officer contended that the consideration for supply of software embedded in hardware is royalty under section 9(l)(vi). High Court ruling The High Court, held that what was sold by the assessee to its Indian customers was a GSM which consisted of both hardware and software. The High Court had also observed that - (i) The software that was loaded on the hardware did not have any independent existence; (ii) The software supply is an integral part of GSM mobile telephone system and is used by the cellular operators for providing cellular services to its customers; (iii) The software is embedded in the system and there could not be any independent use of such software; (iv) This software merely facilitates the functioning of the equipment and is an integral part of the hardware. The High Court held that where payment is made for hardware in which the software is embedded and the software does not have independent functional existence, no amount could be attributed as royalty for software in terms of section 9(l)(vi). Section 44DA - Royalty and FTS connected with a PE in India - Taxable at normal rates (40% in case of a foreign company) - Expenses wholly & exclusively incurred in connection with PE can be claimed - Reimbursement of expenses incurred by HO towards PE which is paid to HO can be claimed - Compulsory maintenance of books and audit is required
SECTION 115A - Interest to a non-resident Where the total income of a foreign company or a non-resident includes any income by way of (1) Interest received from Government or an Indian concern on moneys borrowed by the Government/ Indian concern in foreign currency, other than referred to in (2), (3) & (4) below. (2) Interest referred to in section 194LB received from an infrastructure debt fund referred to in section 10(47) on money borrowed by infrastructure debt fund in foreign currency Applicable Rate of Tax (3) Interest referred to in section 194LC received from an Indian company, 5% (i) in respect of monies borrowed by it at any time on or after the 1st day of July, 2012 but before the 1st day of July, 2020 in foreign currency, from a source outside India, (a) under a loan agreement; or (b) by way of issue of long-term bonds, as approved by the Central Government in this behalf; and 20% 5% (ii) to the extent to which such interest does not exceed the amount of interest calculated at the rate approved by the Central Government in this behalf, having regard to the terms of the loan or the bond and its repayment. (4) Interest referred to in section 194LD received by Foreign Institutional Investor or Qualified Foreign Investor from an Indian company or Indian Government where such interest is payable on or after 1-6-2013 but before 1-6-2020 on investment made by Foreign Institutional Investor or Qualified Foreign Investor in foreign currency in: 5% (a) Rupee denominated bond of an Indian Company; or (b) Government security. Provided that the rate of interest in respect of bond referred to in (a) shall not exceed the rate notified by the Central Government. (5) Interest on Rupee Denominated Bonds issued outside India (Finance Act, 2017) (6) Deemed Dividend referred to in section 2(22)(e) 20% (7) Distributed Income in the nature of interest from SPV received from Business Trust 5% 5%
IMPORTANT TIPS: 1. Special rate of tax is applicable on the above-mentioned incomes only. Balance income of the assessee will be chargeable to tax at normal rates applicable to assessee. 2. No deduction in respect of any expenditure or allowance shall be allowed to the assessee under sections 28 to 44C and section 57 in computing the above income. 3. Deduction under Chapter VI-A is not available on the above mentioned income. Therefore, if gross total income of the assessee consists of above income only, then no deduction shall be allowed to him/it under chapter VI-A. However, if other incomes are also included in the gross total income, the deduction under Chapter VI-A is limited to other incomes only. SECTION 115BBA - Tax on Non-Resident Sportsmen or Sports Associations Where the total income of an assessee (a) being a sportsman (including Athlete) who is not a citizen of India and is a nonresident, includes any income received/ receivable by way of - (i) participation in India in any game (other than the games referred to in section 115BB) or sport; or (ii) advertisement, or (iii) contribution of articles relating to any game or sport in India in newspapers, magazines or journals; or (b) being a non-resident sports association or institution, includes any amount guaranteed to be paid or payable to such association or institutions in relation to any game (other than the games referred to in section 115BB) or sport played in India; (c) being an entertainer, who is not a citizen of India and is a non-resident, includes any income received or receivable from his performance in India Tax Rate 20% 20% 20% IMPORTANT TIPS: 1. Special rate of tax is applicable on the above-mentioned incomes only. Balance income of the assessee will be chargeable to tax at normal rates applicable to assessee. 2. No deduction or Allowance shall be allowed in computing income referred to in (a), (b) and (c). 3. It shall not be necessary for the assessee to furnish return under section 139 if - (i) The total income of the assessee consist of only the incomes referred to in (a), (b) & (c) above and (ii) Tax at source has been deducted from such income.
SECTION 194-E - Tax deduction at Source TDS On Payment to Non-Resident Sportsmen or Sports Associations or An Entertainer: Where any income referred to in section 115BBA is payable to a non-resident sportsman (including an athlete) or an entertainer who is not a citizen of India or a non-resident sports association or institution, the person responsible for making the payment shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of 20%. Case Law Indcom v. Commissioner of income-tax (TDS) (Calcutta) Issue Would non-resident match referees and umpires in the games played in India fall within the meaning of sportsmen to attract taxability under the provision of section 115BBA, and consequently attract the TDS provision under section 194E in the hands of the payer? High Court decision On this issue, the Calcutta High Court observed that, in order to attract the provision of the section 194E, the person should be a non-resident sportsperson or non-resident sport association or institution whose income is taxable as per the provision of section 115BBA. The umpires and the match referees can be described as professionals or technical person who render professional or technical service, but they cannot be said to be either non-resident sportsmen (including an athlete) or on-resident sport association or institution so as to attract the provision of section 115BBA and consequently, the provision of tax deduction at source under section 194E are also not attracted in this case. Though for the purpose of section 194J, match referees and umpires are consideration as professionals, the tax deduction provision there under are attracted only in case where the deductee is a resident individual, which is not so in the present case. Therefore, although the payments made to non-resident umpires and the match referees are income which has accrued and arisen in India. The same are not taxable under the provision of section 115BBA and thus, the assessee is not liable to deduct tax under section 194E. Note - It may be noted that since income has accrued and arisen in India to the non-resident umpires and match referees, the TDS provision under section 195 would be attracted and tax would be deductible at the rates in force.
Illustration 1: Non-resident sportsman wins a car of FMV of Rs 10,00,000 as Man of the Match Prize awarded by Sahara India. Now Sahara India shall deposit the following TDS: (10,00,000*79.4/100) - 10,00,000 TDS = 2,59,446 Now Income of non-resident sportsman in Rs 12,59,446. Tax thereon @ 20.60% is Rs 2,59,446 which has been deposited as TDS. The non-resident sportsman is not required to file ROI. Illustration 2: Michael Jackson, a citizen of U.S.A. and a non-resident makes a dance performance in Kolkata. He received Rs 10 crores for the dance performance. He has incurred the following expenditure: (1) Travel Expenditure = Rs 20 Lakh (2) Hotel accommodation = Rs 10 lakh (3) Other expenses = Rs 5 lakh Here, section 115BBA shall be applicable. Rs 10 crores shall be taxable @ 23.69% and no deduction for any expense shall be allowed. Tax shall be deducted by the payer @ 23.69% on Rs 10 crores.
Taxation of NRI's 1. Section 115C: Definitions Who is an NRI Specified Assets Individual + Citizen of India/Person of Indian origin + Non-Resident 1. Shares of Indian Company (Private or Public) 2. Debentures of Public Limited Indian Company 3. Deposits in Public Limited Indian Company 4 Government Securities Foreign Exchange Assets Specified Assets purchased in convertible foreign exchange Long Term Capital Gains LTCG from foreign exchange assets. Investment Income Interest income from foreign exchange assets and deemed dividend under section 2(22)(e). 2. Section 115D: Method of Computation Investment Income Sections 28 to 44C, Section 57 and Chapter VI-A are not available Long Term Capital Gains Chapter VI-A not available, Indexation not permitted Other Incomes Normal Provisions 3. Section 115E: Tax Rates Long Term Capital Gains : 10% Investment Income : 20% Other Incomes Normal Tax Rates 4. Section 11SF: Exemption 1. NRI derives LTCG 2. Within Six months from the date of transfer 3. Invests the net consideration in specified assets LTCG X Cost of new asset/ Net consideration (Similar to 54F) is not taxable New asset should be retained for 3 years from the date of its acquisition. If transferred/converted into money before 3 years, then the LTCG exempted earlier taxable as LTCG in the year in which the new asset is transferred
5. Section 115G: Exemption from condition of filing ROI ROI not to be filed if 1. Total income includes only Investment Income and/or LTCG. 2. Tax is deducted at source 6. Section 115H: Chapter to apply even if NRI becomes resident NRI Becomes Resident. Can file declaration with ROI of Assessment Year in which he becomes resident. To the effect that he wants to be governed by the provisions of this chapter. Chapter to apply for Investment Income from foreign exchange asset (no deduction of any expense, no deduction under Chapter VI-A and Tax Rate Flat 20%). Chapter to apply for subsequent Assessment Years also till the time the assets are transferred/converted into money. 7. Section 115-I states that this Chapter is optional and the NRI may choose it if he wants
Questions on Non-Resident Taxation 1. David, a foreign national and a cricketer came to India as a member of Australian cricket team in the year ended 31 st March, 2018. He received Rs 5 lakhs for participation in matches in India. He also received Rs 1 lakh for an advertisement of a product on TV. He contributed articles in a newspaper for which he received Rs 10,000. When he stayed in India, he also won a prize of Rs 10,000 from horse racing in Mumbai. He has no other income in India during the year. (i) Compute tax liability of David for Assessment Year 2018-19. (ii) Are the income specified above subject to deduction of tax at source? (iii) Is he liable to file his return of income for Assessment Year 2018-19? What would have been his tax liability, had he been a match referee instead of a cricketer? Answer (i) Computation of tax liability of David for the A.Y.2018-19 Particulars Income taxable under section 115BBA Income from participation in matches in India 5,00,000 Advertisement of product on TV 1,00,000 Contribution of articles in newspaper 10,000 Total income 6,10,000 Tax @ 20% under section 115BBA on Rs 6,10,000 1,22,000 Tax @ 30%under section 115BB on income of Rs 10,000 from horse races 3,000 Basic Tax payable 1,25,000 Add: Cess at 3% 3,750 Total tax liability of David for the A.Y.2018-19 1,28,750 (ii) Yes, the above incomes are subject to tax deduction at source. Income referred to in section 115BBA (i.e., Rs 6, 10,000, in this case) is subject to tax deduction at source @ 20% under section 194E. Income referred to in section 115BB (i.e., Rs 10,000, in this case) is subject to tax deduction at source@30% under section 194BB. Since David is a non-resident, the amount of tax to be deducted calculated at the prescribed rates mentioned above, would be increased by education cess@2% and secondary and higher education cess @ l%.
(iii) Section 115BBA provides that if the total income of the non-resident sportsman comprises of only income referred to in that section and tax deductible at source has been fully deducted, it shall not be necessary for him to file his return of income. However, in this case, Mr. David has income from horse races as well. Therefore, he cannot avail the benefit of exemption from filing of return of income as contained in section 115BBA. Hence, he would be liable to file his return of income for A.Y.2018-19. (iv) The Calcutta High Court has, in Indcom v. CIT, held that match referees do not fall within the meaning of sportsmen to attract the provisions of section 115BBA.Therefore, although the payments made to non-resident match referees are income which has accrued and arisen in India, the same are not taxable under the provisions of section 115BBA. They are subject to the normal rates of tax. Particulars Rs (In Lakhs) Tax @ 30% under section 115BB on winnings of Rs 10,000 from horse races 3,000 Tax on Rs 6,10,000 at the rates in force Up to Rs 2,50,000 NIL 2,50,000-5,00,000 @ 5% 12,500 5,00,000-6,10,000 @20% 22,000 34,500 Total Tax 37,500 Add: Cess at 3% 1,125 Total tax payable 38,625 2. Mr. Manas is a distributor of lottery tickets. He won Rs 6,00,000 as prize money on unsold lottery tickets. It was offered as business income. The Assessing Officer wants to tax the same as lottery winning at the rate prescribed under section 115BB. Is he justified? Answer The issue under consideration is whether winnings of prize money on unsold lottery tickets held by the distributor of lottery tickets can be subject to tax at the rate of 30% prescribed under section 115BB. In CIT v. Manjoo and Co., the Kerala High Court observed that the receipt of winnings from lottery by the distributor was not on account of any physical or intellectual effort made by him and therefore cannot be said to be "income earned by him in business. The unsold lottery tickets cease to be stock-in-trade of the distributor because, after the draw, those tickets are unsalable and have no value except waste paper value and the distributor will get nothing on account of the tickets except any prize winning ticket if held by him, which, if produced will entitle him for the prize money. Further, winnings from lotteries are assessable under the special provisions of section 115BB, irrespective of the head under which such income falls. Therefore, the Kerala High Court held that the rate of 30% prescribed under section 115BB would be applicable on prize money winnings received
by a distributor on unsold lottery tickets held by him. Applying the rationale of the Kerala High Court ruling to the case on hand, the Assessing Officer's intention to tax the prize money received by the distributor on unsold lottery tickets held by him at the rate prescribed under section 115BB is justified. 3. Liaison Office maintained in India to explore the opportunity of business in India does not constitute business connection. In the context of provisions contained in the Income- tax Act, 1961 examine the correctness of the statement. Answer The statement is correct. If a Liaison Office is maintained solely for the purpose of carrying out activities which are preparatory or auxiliary in character, and such activities are approved by the Reserve Bank of India, then, no business connection is established. In this case, the Liaison Office is maintained for the purpose of exploring the opportunity of business in India, which is in the nature of preparatory or auxiliary activity. It is assumed that such activities are approved by the Reserve Bank of India. Since it does not undertake any commercial, trading or industrial activity, directly or indirectly, the Liaison Office does not constitute a business connection in this case. 4. Omega Ltd., an event management company, organized a concert of international artists in India. In this connection, it engaged the services of an overseas agent Mr. John from UK to bring artists to India. He contacted the artists and negotiated with them for performance in India in terms of the authority given by the company. He did not take part in event organized in India. The company made the payment of commission of Rs 1 lakh to the overseas agent. Discuss the liability for tax deduction at source for the assessment year 2018-19. Answer An overseas agent of an Indian company operates in his own country and no part of his income accrues or arises in India. His commission is remitted directly to him and is, therefore, not received by him or on his behalf in India. The commission paid to the non-resident agent for services rendered outside India is, thus, not chargeable to tax in India. Since commission income for contacting and negotiating with artists by Mr. John, a non-resident, who remains outside India is not subject to tax in India, consequently, there is no liability for deduction of tax at source. It is assumed that the commission of Rs 1 lakh was remitted to Mr. John outside India.